Showing posts with label regulator. Show all posts
Showing posts with label regulator. Show all posts
Wednesday, 24 January 2024
Thursday, 20 July 2023
A Level Economics 46: The Role of Regulatory/Competition Authority
Competition authorities and regulators play a crucial role in promoting competition and contestability in non-perfectly competitive markets. They use various tools and interventions to address market distortions, protect consumers, and create a level playing field for businesses. Here are some ways competition authorities and regulators promote competition in non-perfectly competitive markets, along with examples to illustrate their impact:
1. Antitrust Enforcement: Competition authorities enforce antitrust laws to prevent anti-competitive practices, such as collusion, price-fixing, and abuse of dominant market positions. They investigate and take legal action against firms engaging in these behaviors to ensure fair competition.
Example: The European Commission fined Google €2.42 billion in 2017 for promoting its own shopping comparison service in search results and demoting competitors, violating EU antitrust rules. This action aimed to restore competition and give fair visibility to rival comparison shopping services.
2. Merger Control: Competition authorities review mergers and acquisitions to prevent the creation of dominant market positions that could stifle competition. They assess whether mergers are likely to harm competition and impose conditions or block mergers if necessary.
Example: In 2018, the U.S. Department of Justice (DOJ) filed a lawsuit to block AT&T's acquisition of Time Warner, citing potential harm to competition in the media and entertainment industry. The court-approved the merger only after significant divestitures and behavioral commitments were made to maintain competition.
3. Market Studies and Reports: Competition authorities conduct market studies to identify barriers to entry, anti-competitive practices, and market inefficiencies. These studies inform policymakers and regulators, leading to targeted interventions to enhance competition.
Example: The UK's Competition and Markets Authority (CMA) conducted a market study of the online platforms and digital advertising market in 2019. The study revealed concerns about the market power of large platforms and led to proposals for a Digital Markets Unit to enforce a new code of conduct and promote competition.
4. Consumer Protection Measures: Competition authorities protect consumers by ensuring businesses provide accurate information, fair contracts, and quality products. They may penalize firms for false advertising or unfair trading practices.
Example: The Federal Trade Commission (FTC) in the U.S. has taken action against companies making false claims about health products, deceptive advertising, or unfair billing practices, aiming to protect consumers from misleading information and scams.
5. Price Regulation: In some industries, regulators may impose price controls or regulate profit margins to prevent monopolistic pricing and ensure affordable access to essential goods and services.
Example: In healthcare, governments or regulatory bodies may regulate drug prices or set price ceilings for medical services to prevent excessive pricing and ensure accessibility to healthcare for all citizens.
6. Promoting Market Entry and Contestability: Competition authorities may encourage the entry of new firms into the market to increase competition. They may also promote contestability by removing barriers to entry and fostering innovation.
Example: In the telecommunications industry, regulators may allocate spectrum licenses to new entrants to encourage competition and introduce new technologies, leading to improved services and lower prices for consumers.
In conclusion, competition authorities and regulators actively promote competition and contestability in non-perfectly competitive markets through antitrust enforcement, merger control, market studies, consumer protection measures, price regulation, and measures to enhance market entry and contestability. Their interventions aim to create competitive markets that benefit consumers, encourage innovation, and promote economic growth while safeguarding against anti-competitive practices.
Wednesday, 19 July 2023
A Level Economics 34: Understanding Market Structures
The structure of a market depends on the number of firms operating within it and their ability to enter and exit the market freely, which is known as contestability. Here's an explanation with definitions and examples:
Number of Firms: The number of firms in a market refers to the total count of independent businesses competing with each other to sell similar or substitute goods or services. The number of firms influences the level of competition and market concentration, which, in turn, affects market structure. Market structures can range from a monopoly (one firm) to perfect competition (many firms).
Example: A market with only one telecommunications company providing phone services would be a monopoly. In contrast, a market with multiple telecommunications companies competing with each other would reflect a more competitive market structure, such as oligopoly or perfect competition.
Contestability (Ability to Enter and Exit Markets Freely):Contestability refers to the ease with which new firms can enter a market and compete with existing firms, as well as the freedom for existing firms to exit the market without significant barriers or impediments. The degree of contestability affects the potential for new entry and the level of competition within a market.
Example: In a market with low barriers to entry and exit, such as the smartphone app development industry, new firms can easily enter the market and offer their apps. If these firms can compete effectively with existing app developers, it indicates high contestability and a more competitive market structure.
The Relationship:The number of firms and contestability are interrelated and jointly determine the structure of a market. When there are a large number of firms and low barriers to entry and exit, it promotes competition and leads to more competitive market structures, such as perfect competition or monopolistic competition.
In contrast, when there are a small number of firms and high barriers to entry and exit, it restricts competition and can result in more concentrated market structures, such as oligopoly or monopoly.
Example: Consider the market for coffee shops in a particular city. If there are numerous coffee shops, and new coffee shops can enter the market easily and compete with existing ones, it indicates a highly contestable market with many firms. This scenario would align with a competitive market structure, such as perfect competition or monopolistic competition.
However, if there are only a few dominant coffee shop chains and significant barriers to entry, such as high startup costs or exclusive lease agreements, the market would have low contestability. This would result in a less competitive market structure, such as an oligopoly or even a monopoly if one chain has a dominant market position.
In summary, the structure of a market depends on the number of firms operating within it and their ability to enter and exit the market freely. The presence of many firms and high contestability leads to more competitive market structures, while fewer firms and low contestability can result in concentrated market structures with less competition.
Number of Firms: The number of firms in a market refers to the total count of independent businesses competing with each other to sell similar or substitute goods or services. The number of firms influences the level of competition and market concentration, which, in turn, affects market structure. Market structures can range from a monopoly (one firm) to perfect competition (many firms).
Example: A market with only one telecommunications company providing phone services would be a monopoly. In contrast, a market with multiple telecommunications companies competing with each other would reflect a more competitive market structure, such as oligopoly or perfect competition.
Contestability (Ability to Enter and Exit Markets Freely):Contestability refers to the ease with which new firms can enter a market and compete with existing firms, as well as the freedom for existing firms to exit the market without significant barriers or impediments. The degree of contestability affects the potential for new entry and the level of competition within a market.
Example: In a market with low barriers to entry and exit, such as the smartphone app development industry, new firms can easily enter the market and offer their apps. If these firms can compete effectively with existing app developers, it indicates high contestability and a more competitive market structure.
The Relationship:The number of firms and contestability are interrelated and jointly determine the structure of a market. When there are a large number of firms and low barriers to entry and exit, it promotes competition and leads to more competitive market structures, such as perfect competition or monopolistic competition.
In contrast, when there are a small number of firms and high barriers to entry and exit, it restricts competition and can result in more concentrated market structures, such as oligopoly or monopoly.
Example: Consider the market for coffee shops in a particular city. If there are numerous coffee shops, and new coffee shops can enter the market easily and compete with existing ones, it indicates a highly contestable market with many firms. This scenario would align with a competitive market structure, such as perfect competition or monopolistic competition.
However, if there are only a few dominant coffee shop chains and significant barriers to entry, such as high startup costs or exclusive lease agreements, the market would have low contestability. This would result in a less competitive market structure, such as an oligopoly or even a monopoly if one chain has a dominant market position.
In summary, the structure of a market depends on the number of firms operating within it and their ability to enter and exit the market freely. The presence of many firms and high contestability leads to more competitive market structures, while fewer firms and low contestability can result in concentrated market structures with less competition.
--- Structural and Behavioural Barriers to Entry
Key Terms:
Barriers to Entry: Barriers to entry are obstacles or restrictions that prevent new firms from entering a market and competing with existing firms. These barriers can be both structural and behavioral in nature.
Structural Barriers to Entry: Structural barriers to entry refer to inherent characteristics of a market that make it difficult or costly for new firms to enter and establish themselves. These barriers are typically long-term and relate to the market's fundamental structure.
Behavioral Barriers to Entry: Behavioral barriers to entry arise from the actions of existing firms in a market to discourage or limit new entrants. These barriers are often strategic and can be influenced by the actions of dominant players in the market.
Examples and Distinction:
- Structural Barriers to Entry:
a. Economies of Scale: When existing firms in a market benefit from economies of scale, new entrants may find it challenging to match the cost efficiency of established firms. As production increases, the average cost per unit decreases, providing a competitive advantage to larger companies. This discourages new firms from entering and competing with economies of scale.
Example: In the automobile manufacturing industry, large carmakers enjoy economies of scale due to their established production facilities, distribution networks, and purchasing power. New entrants face difficulty achieving similar cost efficiencies, making it a structural barrier to entry.
b. High Capital Requirements: Some markets require substantial upfront investments in machinery, technology, or infrastructure to compete effectively. High capital requirements act as a deterrent for new entrants, limiting their ability to enter the market.
Example: The airline industry demands significant capital investment to purchase aircraft and establish routes. This high capital requirement makes it difficult for new airlines to enter the market and compete with established carriers.
c. Access to Distribution Channels: In certain markets, established firms may control critical distribution channels, making it difficult for new entrants to reach customers effectively. Without access to established distribution networks, new firms may struggle to gain market share.
Example: In the retail industry, large supermarket chains control established distribution networks, making it challenging for new grocery stores to enter the market and compete for shelf space and customer visibility.
- Behavioral Barriers to Entry:
a. Predatory Pricing: Dominant firms may engage in predatory pricing, intentionally setting prices below cost to drive out new entrants. Once competitors are forced out, the dominant firm can then raise prices and regain its market power.
Example: A large software company offering its products at unprofitably low prices to deter new software startups from entering the market is an example of predatory pricing.
b. Brand Loyalty: Established firms often build strong brand loyalty and customer trust over time. This creates a barrier for new entrants as customers may be hesitant to switch to an unknown brand.
Example: Tech-savvy consumers' strong brand loyalty to smartphones may deter new smartphone manufacturers from entering the market, even if they offer innovative features.
c. Exclusive Contracts: Existing firms may enter into exclusive contracts with suppliers or distributors, preventing new entrants from accessing essential resources or distribution channels.
Example: A dominant beverage company entering into exclusive contracts with popular restaurants and convenience stores may limit the ability of new beverage companies to access these sales channels.
In summary, barriers to entry can be both structural and behavioral. Structural barriers stem from inherent market characteristics, such as economies of scale and high capital requirements. Behavioral barriers, on the other hand, result from strategic actions taken by existing firms to discourage or limit new entrants, such as predatory pricing and brand loyalty. Understanding these distinctions helps identify the challenges new firms face in entering competitive markets.
---Regulators and Contestability
Regulators play a crucial role in influencing the degree of contestability in a market by implementing policies and regulations that either promote or hinder competition. Here are several ways regulators can affect contestability in a market, along with examples:
Barriers to Entry and Exit:
- Regulators can influence the ease with which new firms can enter a market by setting entry requirements, licensing, or imposing restrictions on potential entrants.
- They can also impact the ability of firms to exit the market by imposing exit fees, liquidation costs, or other legal barriers.
Example: In the telecommunications industry, regulators can grant or deny licenses to new companies seeking to provide services. If regulators make it easy for new firms to obtain licenses and enter the market, it encourages greater contestability and competition among telecommunications providers.
Anti-Competitive Practices:
- Regulators can enforce antitrust laws to prevent anti-competitive practices, such as price-fixing, collusion, or predatory pricing, which can restrict competition and limit contestability in a market.
Example: In the airline industry, regulators can investigate and take action against airlines engaging in collusion to fix ticket prices. By curbing such anti-competitive practices, regulators ensure a more competitive market that benefits consumers with lower fares and increased choices.
Merger and Acquisition Approval:
- Regulators can assess and approve or reject mergers and acquisitions based on their potential impact on competition and contestability in the market.
- They may require divestitures or impose conditions to ensure that the merged entity does not gain undue market power that could harm competition.
Example: When two pharmaceutical companies propose a merger, regulators may scrutinize the deal to assess its potential effects on competition in the pharmaceutical industry. If the merger is deemed to reduce competition and contestability, regulators may impose conditions or reject the merger to maintain a competitive market.
Price Regulation:
- Regulators can set price caps or price floors to prevent firms from exploiting their market power and to promote a competitive environment.
- Price regulation can prevent monopolistic practices and ensure that consumers have access to reasonably priced goods and services.
Example: In the electricity market, regulators can impose price ceilings to limit the prices charged by power generation companies. This prevents firms from exploiting their dominant position and promotes contestability in the electricity market, allowing new entrants to compete.
Access to Essential Facilities:
- Regulators can ensure that essential facilities or infrastructure, such as transportation networks or communication networks, are accessible to all firms on fair and non-discriminatory terms.
- This prevents the dominant control of essential facilities by a single firm, allowing competitors to enter the market and increase contestability.
Example: In the railroad industry, regulators can mandate that rail network operators provide access to their tracks for other freight companies at fair rates. This promotes competition in the freight transportation market and enhances contestability.
In summary, regulators can significantly influence the degree of contestability in a market through various policies, regulations, and enforcement actions. By promoting fair competition, preventing anti-competitive practices, and ensuring access to essential facilities, regulators contribute to creating more competitive and contestable markets that benefit consumers and promote innovation.
Saturday, 4 February 2023
Wednesday, 15 April 2020
Regulatory Capture? Insurance Regulator rules in Favour of Insurance Industry
City regulator will not intervene over businesses ineligible for payouts writes Kalyeena Makortoff in The Guardian
Small and medium-sized businesses fear they will not be able to survive the economic impact of the coronavirus lockdown. Photograph: James Veysey/Rex/Shutterstock
Most UK businesses will not be eligible for insurance payouts over the Covid-19 lockdown, the City watchdog has warned, adding that it was not prepared to intervene on their behalf.
In an open letter to insurance chief executives on Wednesday, the Financial Conduct Authority said it found that most claimants on business interruption policies did not have the right coverage to warrant a payout during a pandemic.
“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic,” the FCA’s interim chief executive, Christopher Woolard, said.
“While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.”
The move is likely to anger small and medium-sized business owners who fear they will not be able to survive the economic impact of the coronavirus outbreak.
Typical business interruption policies pay up to £100,000 to cover the cost of keeping a company running if it is forced to shut for reasons beyond its control, such as flooding or fires.
However, while large insurers such as Hiscox sold policies before the lockdown that promised to pay out if businesses were forced to shut because of a notifiable disease, business owners say their claims have been denied because the policies do not specifically cover pandemics. A group of brokers and loss adjusters are planning legal action against some of Britain’s largest insurance companies.
The FCA said some small businesses – that earn less than £6.5m in revenues and employ fewer than 50 employees – can still take claims worth up to £355,000 to the Financial Ombudsman Service, which could result in faster decisions than if they were taken through the courts.
However, in a warning shot at the wider financial sector, the watchdog announced that it was also launching a new small business unit that would keep an eye on how smaller firms are treated by financial services during the outbreak.
The FCA also said insurers should be acting quickly to get money to businesses who have legitimate and undisputed claims, and should give partial payments where only part of the claim is under review.
Most UK businesses will not be eligible for insurance payouts over the Covid-19 lockdown, the City watchdog has warned, adding that it was not prepared to intervene on their behalf.
In an open letter to insurance chief executives on Wednesday, the Financial Conduct Authority said it found that most claimants on business interruption policies did not have the right coverage to warrant a payout during a pandemic.
“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic,” the FCA’s interim chief executive, Christopher Woolard, said.
“While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.”
The move is likely to anger small and medium-sized business owners who fear they will not be able to survive the economic impact of the coronavirus outbreak.
Typical business interruption policies pay up to £100,000 to cover the cost of keeping a company running if it is forced to shut for reasons beyond its control, such as flooding or fires.
However, while large insurers such as Hiscox sold policies before the lockdown that promised to pay out if businesses were forced to shut because of a notifiable disease, business owners say their claims have been denied because the policies do not specifically cover pandemics. A group of brokers and loss adjusters are planning legal action against some of Britain’s largest insurance companies.
The FCA said some small businesses – that earn less than £6.5m in revenues and employ fewer than 50 employees – can still take claims worth up to £355,000 to the Financial Ombudsman Service, which could result in faster decisions than if they were taken through the courts.
However, in a warning shot at the wider financial sector, the watchdog announced that it was also launching a new small business unit that would keep an eye on how smaller firms are treated by financial services during the outbreak.
The FCA also said insurers should be acting quickly to get money to businesses who have legitimate and undisputed claims, and should give partial payments where only part of the claim is under review.
Monday, 13 April 2020
Auditors clash with firm directors over the question of 'firms that can survive'
Businesses are under pressure to give full account of how pandemic has affected trade writes Tabby Kinder in The FT
UK companies in the retail, hospitality and construction industries are locked in a battle with auditors to prevent their accounts carrying warnings that risk making the fight to survive the coronavirus crisis harder.
The country’s accounting watchdog is pushing auditors to be tougher when judging whether a company can continue trading as a going concern for the next 12 months. The going concern test is one that companies must pass to secure a clean bill of health from their auditors.
The increased pressure from the Financial Reporting Council is stoking tensions between audit firms and company directors, who are worried that an official question mark in their accounts over whether they can keep trading — known as a qualified audit — would automatically trigger a breach of lending agreements with banks or bondholders.
Several of the UK’s six largest accounting firms, which include KPMG, Deloitte, PwC and EY, have put additional steps in place to review signing off companies as a going concern.
PwC has introduced a panel to sign off on its audit opinions, while Grant Thornton is sending every one of its audits through its technical review team, which is usually reserved for its riskiest or complex audit judgments, according to people familiar with the matter. Both firms declined to comment.
“If any of us are accused of not challenging management after all this is over, that will be hideously unfair,” said one senior auditor. “We are having challenging conversations [with company directors] at colossal scale.”
The pressure on auditors from the FRC comes after a series of accounting scandals led to criticism that the regulator has been too slow to act, lenient and too close to the audit firms it supervises.
“We don’t want boilerplate, we want specific circumstances and disclosure about judgments on going concern,” said a senior official close to the FRC. “For corporates that means the trading environment, and now the audit environment is tougher than ever. It is creating tensions in the system.”
With the government expected to extend the lockdown, senior auditors at a number of the UK’s largest firms said they were asking companies in the hospitality, retail and construction sectors to stress test whether they could survive “zero revenues” for six months or longer.
“It’s not an impossible prospect,” the head of audit at a major accounting firm said of the scenario. “We’re saying you’ll breach covenants in that situation and you need to tell the world that. Directors are pushing back and telling us that’s not realistic. The issue is any consensus on how long this will last is quickly meaningless.”
The economic turmoil unleashed by the government’s effort to contain the virus has already upended the reporting calendar for companies. The Financial Reporting Council and the Financial Conduct Authority have given listed companies two extra months to file their accounts in order to better assess the impact of Covid-19 on their profitability.
The FRC is also urging lenders and investors to react sensibly if the accounts of some large listed companies end up being qualified. “[There is a worry that] markets will overreact to what is a statement of the blindingly obvious,” the senior official close to the watchdog said.
The watchdog is holding talks with banks, shareholder groups and bondholders to warn them to prepare for a flood of going concern warnings in the companies they own or have lent to.
The Institute of Chartered Accountants in England and Wales, the profession’s trade body, is expected to put out guidance this week that will “remind” accountants working in the finance departments of listed companies of their disclosure obligations on going concern, according to a person familiar with the matter.
“Many boards are going to have to come to conclusions today that would have seemed absurd three months ago, and they are obliged to consider that in their results,” the person said.
UK companies in the retail, hospitality and construction industries are locked in a battle with auditors to prevent their accounts carrying warnings that risk making the fight to survive the coronavirus crisis harder.
The country’s accounting watchdog is pushing auditors to be tougher when judging whether a company can continue trading as a going concern for the next 12 months. The going concern test is one that companies must pass to secure a clean bill of health from their auditors.
The increased pressure from the Financial Reporting Council is stoking tensions between audit firms and company directors, who are worried that an official question mark in their accounts over whether they can keep trading — known as a qualified audit — would automatically trigger a breach of lending agreements with banks or bondholders.
Several of the UK’s six largest accounting firms, which include KPMG, Deloitte, PwC and EY, have put additional steps in place to review signing off companies as a going concern.
PwC has introduced a panel to sign off on its audit opinions, while Grant Thornton is sending every one of its audits through its technical review team, which is usually reserved for its riskiest or complex audit judgments, according to people familiar with the matter. Both firms declined to comment.
“If any of us are accused of not challenging management after all this is over, that will be hideously unfair,” said one senior auditor. “We are having challenging conversations [with company directors] at colossal scale.”
The pressure on auditors from the FRC comes after a series of accounting scandals led to criticism that the regulator has been too slow to act, lenient and too close to the audit firms it supervises.
“We don’t want boilerplate, we want specific circumstances and disclosure about judgments on going concern,” said a senior official close to the FRC. “For corporates that means the trading environment, and now the audit environment is tougher than ever. It is creating tensions in the system.”
With the government expected to extend the lockdown, senior auditors at a number of the UK’s largest firms said they were asking companies in the hospitality, retail and construction sectors to stress test whether they could survive “zero revenues” for six months or longer.
“It’s not an impossible prospect,” the head of audit at a major accounting firm said of the scenario. “We’re saying you’ll breach covenants in that situation and you need to tell the world that. Directors are pushing back and telling us that’s not realistic. The issue is any consensus on how long this will last is quickly meaningless.”
The economic turmoil unleashed by the government’s effort to contain the virus has already upended the reporting calendar for companies. The Financial Reporting Council and the Financial Conduct Authority have given listed companies two extra months to file their accounts in order to better assess the impact of Covid-19 on their profitability.
The FRC is also urging lenders and investors to react sensibly if the accounts of some large listed companies end up being qualified. “[There is a worry that] markets will overreact to what is a statement of the blindingly obvious,” the senior official close to the watchdog said.
The watchdog is holding talks with banks, shareholder groups and bondholders to warn them to prepare for a flood of going concern warnings in the companies they own or have lent to.
The Institute of Chartered Accountants in England and Wales, the profession’s trade body, is expected to put out guidance this week that will “remind” accountants working in the finance departments of listed companies of their disclosure obligations on going concern, according to a person familiar with the matter.
“Many boards are going to have to come to conclusions today that would have seemed absurd three months ago, and they are obliged to consider that in their results,” the person said.
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